Not cosmetic reforms

In every country --- no matter developed or developing --- the central bank serves as the economy's nervous system. It regulates interest rates, controls money supply, maintains foreign exchange reserves, and fights inflation. Such responsibilities are critical to ensuring economic stability, especially during times of crisis, such as inflationary spikes, recessions, or declining foreign reserves.

These roles are even more pronounced for the Bangladesh Bank as it has its finger prints in all aspects of the country's financial system --- from regulating commercial banks, bailing out nationalised banks, to managing non-performing loans and even making efforts to bring back laundered money from abroad.

But far too long Bangladesh has treated its central bank like a replaceable cog in the machine, swapping out governors as if a new face would fix the deep-rooted problems. This illusion of governance has allowed financial scandals, regulatory failures, and gross mismanagement to fester. The banking sector is in a dismal state, plagued by corruption, financial irregularities, and preferential treatment for powerful borrowers.

Non-performing loans (NPLs) are skyrocketing, inflation is surging, money laundering is rampant, and foreign exchange reserves are declining-the Bank's oversight has been frail, effectiveness is highly questionable, and public trust in the system has largely eroded. This is a crisis that demands immediate action. Simply put, the Bangladesh Bank, as it stands, is failing, and piecemeal reforms will not suffice.

THE NPL TIME BOMB: Default loans in Bangladesh have spiralled out of control, reaching a staggering Tk 1456.33 billion by the end of 2023, accounting for 9 per cent of total loans. This places Bangladesh among the worst offenders globally, with an NPL rate double that of most developing countries, where the rate typically ranges between 3.2 per cent and 4.5 per cent. Bangladesh's performance is even more dismal when compared to South Asia, where the average NPL ratios from 2012 to 2021 were 7 per cent in India and 3.94 per cent in Sri Lanka.

Even more troubling, the total amount of distressed loans-comprising NPLs, rescheduled loans, and restructured write-offs-amounted to nearly one-third of all outstanding loans in the banking system by the end of 2023. Much of this problem can be traced to the lenient policies introduced by the central bank allowing banks to reschedule loans with minimal down payments and extended repayment periods for borrowers.

In a bid to meet conditions tied to a $4.7 billion loan package from the IMF, Bangladesh Bank has recently committed to an unrealistic goal of reducing NPLs to 8 per cent by 2026. The Bank's strategy, which relies heavily on easing loan write-offs, is utterly reckless and ignores the underlying issues of a weakening economy and systemic corruption that fuel NPLs. Without addressing these root causes, any promise of reduction in NPLs may be superficial and unrealistic.

INFLATION IS A TICKING TIME BOMB: For decades, Bangladesh has struggled with persistently high inflation, averaging 6.57 per cent annually between 1994 and 2024. By mid-2024, inflation had surged to 11.66 per cent, easing only slightly to 10.5 per cent by August-still well above regional averages. A major donor bank has forecasted that Bangladesh's inflation rate will rise to 10.1 per cent in the next fiscal year, compared to 4.5 per cent in India and 5.5 per cent in Sri Lanka.

In response, the central bank has opted to tighten the money supply, as if that alone could control the soaring prices. Bangladesh's inflation is largely driven by supply-side disruptions and currency depreciation, not an overheated economy. The devaluation of the taka has only worsened the situation, diverting remittances into informal channels, and deepening the inflation crisis. Instead of relying on short-term fixes, the Bangladesh Bank needs to confront these underlying issues head-on.

RAPID DECLINE IN FOREIGN EXCHANGE RESERVES: Since September 2021, Bangladesh's foreign exchange reserves have been steadily declining, reaching a critical low of $20.46 billion in August 2024-barely enough to cover two and a half months of imports. More concerning is that the net international reserves have dwindled to a mere $13 billion.

The central bank's poor handling of exchange rates has exacerbated the issue, pushing remittances into informal channels and further depleting reserves. Although a recent shift to a "crawling peg" exchange rate system and the receipt of $2.11 billion in remittances during the first 28 days of September provide some relief, the reserve situation is unlikely to improve significantly without bold corrective measures.

MONEY LAUNDERING IS A NATIONAL EMBARRASSMENT: The scale of money laundering in Bangladesh is staggering and alarming. Official estimates suggest that over Tk 1.0 trillion has been illicitly transferred abroad. In 2021, Global Financial Integrity (GFI) reported that Bangladesh lost around $8.27 billion annually between 2009 and 2018 due to the mis-invoicing of import-export goods by traders to evade taxes and facilitate illegal cross-border money transfers.

Every year, billions of dollars are funnelled out of the country through schemes like hundi, over-invoicing, and under-invoicing. While the Money Laundering Prevention Act of 2012 exists in name, its enforcement has been weak and rare, with those responsible for drafting and enforcing the law often implicated in these very activities. Although the 2023 global Anti Money Laundering (AML) Index indicated some progress for Bangladesh, such reports are often based on unreliable data and fail to reflect the true scale of the problem.

The harsh reality is that illegal financial flows are critically draining the nation's wealth. The interim government has formed a committee, led by Bangladesh Bank, to recover laundered money. The Bank must take decisive action against these criminal networks. Yet, success is far from guaranteed, given the sophisticated methods and networks used to conceal assets in both offshore and onshore laundering operations.

RADICAL REFORM IS NON-NEGOTIABLE: Cosmetic reforms or half-hearted policy adjustments will not be enough to save Bangladesh Bank-it needs a comprehensive, top-to-bottom overhaul. The central bank must be freed from the political and bureaucratic interference that has crippled its effectiveness for years. It should become a fully independent and accountable institution-free from corrupt interests. Monetary policies should be crafted diligently by highly qualified experts, not by bureaucrats climbing the ranks without the necessary expertise.

The interim government must push for radical reforms. State-owned banks, long mired in political meddling and mismanagement, must be streamlined, or privatised to safeguard nation's scare resources. The culture of cronyism must be dismantled, and the Bangladesh Bank must shift its focus to real, sustainable solutions rather than donor-driven fantasies.

Most importantly, it is imperative that the Bangladesh Bank be governed by an independent board of governors, shielded from political and bureaucratic influence, to enhance its operational effectiveness. The reliance on a single governor must give way to a system of collective decision-making on critical policy matters. Only through such bold and structural reforms can the central bank restore its integrity and safeguard the nation's long-term economic stability.

Dr Dowlah is a retired Professor of Economics and Law in the United States. Currently, he serves as the Chairperson of the Bangladesh Institute of Policy Studies (www.bipsglobal.org).